While most economists are speaking about a soft landing, certain factors indicate a potential US recession. According to American Century Investments, “In previous periods of economic stress, soft landings have been uncommon….Additionally, higher prices for everything from weekly groceries to mortgage loans are straining consumers’ wallets and represent another slowdown sign.”

The asset manager highlights that high interest rates and the increased cost of living impact consumers, thus fuelling recession risk. Victor Zhang, Senior Vice President and Chief Investment Officer for American Century Investments, opines, “We believe these financial burdens will continue to weigh on corporate profits and drag down consumer spending, which accounts for approximately 70% of gross domestic product (GDP).”

Hence, the asset manager feels the chances of a recession are higher than that of stagflation or a “Goldilocks” scenario.

In the event of a recession, Charles Tan, Senior Vice President and Co-Chief Investment Officer of Global Fixed Income for American Century, advises fixed-income investors to go for diversified strategies with longer durations. “A modest allocation to high-quality investment-grade credit may now provide more attractive yields,” as per Tan.

He also highlights that higher-than-normal inflation can erode the consumer’s spending power. Hence, Tan believes that inflation-protection strategies should be the core of fixed-income allocations.

For stock investors, the asset manager suggests quality companies in defensive sectors, like utilities, health care, and consumer staples. “Additionally, we think dividend-paying stocks look attractive for the income levels they have historically provided,” affirms Richard Weiss, Chief investment officer of Multi-Asset Strategies at American Century Investments. The asset manager further recommends that investors should focus less on the style of investing, such as growth and value.

Separately, American Century is upbeat over gold amid falling interest rates while cautioning investors against commodities. The asset manager also urges investors to limit their exposure to real estate assets. “Real estate investment trusts (REITs) have tended to lag as poor economic conditions weigh on residential and commercial real estate markets,” says Weiss.

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